When and why do venture-backed companies obtain venture lending?

The reasons why high-growth entrepreneurial companies at the pre-revenue stage should not obtain debt are obvious. These companies do not have stable cash flows yet to serve and repay the debt. They typically have little assets-in-place to provide collateral to foreclose in the event of default.
Moreover, they are exposed to substantial risks and uncertainties as they typically operate in high-tech industries such as the biotech or software industries. Starting with the seminal work by Jensen and Meckling (1976), the theoretical literature on capital structure has demonstrated that firms with low levels of cash flows from operations and many growth opportunities rely on equity rather than debt (see Harris and Raviv, 1991 for a literature review). Also, high-growth young companies do not need debt as a device against the agency costs of free cash flows (Jensen, 1986) as cash flows typically are negative. The literature has used these arguments to explain equity-like contracts used in venture capital (VC) financing. Moreover, in addition to capital injection, entrepreneurial companies benefit from value-adding advice and close monitoring that VC investors offer. For example, Hellmann and Puri (2002) demonstrate that venture capitalists play a significant role in the professionalization of entrepreneurial companies.
In practice, however, in combination with equity financing from VC firms, high-growth entrepreneurial companies have started receiving debt financing from institutions that specialize in venture lending (VL), i.e. in providing loans, but not advice and close monitoring, to entrepreneurial companies that traditional banks turn away. The aim of our paper is to contribute to our understanding of the reasons behind lending to high-growth entrepreneurial companies with uncertain future prospects that are still at the pre-revenue stage and that have little tangible assets.